Special Purpose Liquidators (SPLs) - How you can oppose their appointment

In brief - Appointment of SPLs not a foregone conclusion

While special purpose liquidators might be viewed by some as a means to advance claims on behalf of creditors and at the same time expand business, incumbent liquidators are right to look at them as a potential threat to their position.

It is important to know that there may be ways of opposing the appointment of SPLs.

Role of a special purpose liquidator

An SPL inevitably picks over the file of the liquidator and whilst the SPL is usually appointed for particular tasks, they often stray outside of their area. What's more, because of how the case law has developed, they are almost always funded in what they do.

Most of us will be aware of Justice Barrett's decision in Lo v Nielsen & Moller (Autoglass) NSW Pty Limited [2008] NSW SC 407.

This case is used as authority for the proposition that all a party has to do to get an SPL appointed is to show that he or she has a legitimate concern, is prepared to indemnify and the liquidator has some impediment which prevents him or her from pursuing a potential claim, out of either conflict or embarrassment.

In Lo, the SPL was proposed in order to look into a number of things, including the conduct of the incumbent liquidator. Ultimately the liquidator was replaced by the SPL.

SPLs are now being advanced to inquire into the conduct of liquidators themselves.

Company in liquidation following fraud by director

Recently I found myself chasing a preference from the ATO.

It related to a company that had gone into liquidation after one of its directors had committed a fraud on the company, its clients and his co-directors by stealing a very large sum out of the clients' trust account. The business of the company was an accountancy practice.

My client was initially appointed as the voluntary administrator and during the course of the voluntary administration, he sold the business to the existing directors in a new corporate entity. The sale took a fair while to complete. Creditors were advised of the sale at the second meeting and agreed to adjourn the meeting to allow the sale to complete.

Secured creditor debt was taken on by the purchasers, monies were paid for the assets, employee entitlements were taken over and some other monies were paid in relation to work in progress, but no allowance was made for goodwill in the sale.

That sale completed in 2007. In 2009 the liquidator decided to pursue a preference claim against the ATO, which itself was a large creditor in the liquidation.

ATO application to appoint special purpose liquidator

In 2011, four years after the sale had gone through, the Australian Taxation Office (ATO) made an application to appoint an SPL to investigate, amongst other things, potential claims including a claim against the liquidator for failing to get any value for the asserted goodwill in the company's business. The ATO engaged heavy duty senior counsel, a very competent junior counsel and used its best people in the application.

My client was not prepared to take the ATO's application lying down and joined issue with the Commissioner. We obtained an expert report indicating that my client had acted in accordance with professional norms, a report from the accountant my client first spoke to about the potential sale, indicating that in his view there was no goodwill, and my client put on a very lengthy affidavit as to what he had done in the matter.

Investigation into the conduct of a liquidator

Despite the ATO's view that its application for an SPL would inevitably succeed, I was of the view that an investigation into the conduct of a liquidator by an SPL went beyond the powers of the SPL. It is the Court that looks at the conduct of an administrator or a liquidator under Sections 235, 237, 241, 447E and 1321.

Justice Barrett's decision in Lo was effectively a consent judgment given in response to an application in which no one had raised the suggestion either of a definitive claim against the liquidator or of the fact that it is the Court, not an SPL, which should investigate the conduct of a liquidator.

There is a very well considered judgment on the point, one that the search engines do not pick up because the Court dealt with a special purpose administrator rather than an SPL. It is the decision in Honest Remark Pty Limited v All State Exploration NI & Ors [2006] NSW SC 735. That is a judgment of Justice Brereton and it involves an application to appoint a special purpose administrator to conduct an investigation into the conduct of a deed administrator.

Court responsible for conduct of administrator or liquidator

Decided before Lo, the Judge observed that he had not encountered a case in which an SPL had been appointed to investigate the conduct of another liquidator with a view to a potential claim against him or her, and that was because it is the Court which holds the supervisory function of investigating the conduct of liquidators. His Honour said, at 62:

"In my opinion, there is no power to appoint a special purpose liquidator for the purpose of investigating the conduct of the original liquidator as such... It is not the duty of a liquidator to investigate allegations against themselves or some of them. Such an investigation is not part of the administration, and it cannot, therefore, be carved out of the administration and given to a special purpose liquidator." 

At paragraph 100 he said:

"Given this range of available remedies [the statutory range which allows a liquidator or administrator to be reviewed by the Court] that are attended with safeguards and protections, it would be wholly inappropriate to appoint a special purpose administrator to investigate the administration... The inherent jurisdiction of the Court does not confer powers to appoint a special purpose administrator [such an appointment] will circumvent the conditions and protections that attend the several appropriate remedies for the supervision of administrators and review of their decisions under Sections 236, 237, 241, 447E and 1321. No Court acting reasonably could grant the relief sought." 

Can a court appoint an SPL to investigate the conduct of a liquidator?

We therefore appear to have two conflicting authorities, one from Justice Barrett and one from Justice Brereton, on whether or not the Court can appoint an SPL with a view to investigating the conduct of a liquidator.

My view is that that appearance of conflict is illusory. Justice Barrett was not looking at appointing an SPL specifically to investigate the conduct of the liquidator with a view to formulating a claim against the liquidator. Justice Brereton was.

Additionally, Justice Barrett was not provided with a copy of Justice Brereton's decision, did not refer to it and did not refer to the statutory issues which Justice Brereton raised.

Justice Barrett dealt with a consent matter in the busiest corporations list in Australia and whilst he is without doubt one of our most outstanding judicial minds, I think Lo should not be taken as the absolute point of reference for any SPL application.

Application to appoint SPL unsuccessful

I am pleased to say that my client has now settled the preference claim on good terms and the application to appoint the SPL has gone away.

Most lawyers, including the ATO's, are unaware of the Honest Remark decision. Keep it in your back pocket. It is a very important tool in dealing with the current mania for SPLs.

For further information contact our insolvency team.